Directors & Officers Liability
An appointment to the Board of Directors in an executive or non-executive position brings not only personal prestige but may also bring potential personal liability for a negligent act, or an act outside the appointeeâ€™s authority or which is in breach of duty or trust. Todayâ€™s shareholders, employees, regulatory authorities, customers and creditors expect more from directors and officers and their companies than ever before. Their conduct and integrity is scrutinised with new vigour. Directors or officers can be held responsible for actual or alleged wrongful acts, errors or omissions, including negligent advice, mis-statement or improper disclosure. Additional risk arises during the merger, take-overs and acquisitions process as the slightest error or oversight could leave them exposed to legal actions from a variety of sources.
Unlike a companyâ€™s liability, which could well be limited, the liability of directors and officers may be unlimited. Furthermore, Section 310 of the Companies Act limits the circumstances under which indemnity is provided to directors sued in their personal capacity whilst acting on behalf of the company. In such circumstances, their defence may have to be funded personally. Uninsured directors and officers therefore face the possibility of personal bankruptcy.
A host of recent European Directives as well as a multitude of UK statutory offences impose increased liabilities on directors and officers. The situation becomes more complicated when the organisation has assets, representation or operations overseas. The Companies Act 1985 lists over 200 offences and thatâ€™s not including responsibilities outlined by other relevant legislation such as the Financial Services and Markets Act 2000, the Health & Safety at Work Act 1974, and the Fair Trading Act 1973, to name but a few.
Increased legislation, both in the United Kingdom and world-wide, has escalated the possibility of legal action against directors and officers. Cases such as Enron and Parmalat may have captured the headlines, but they also provide a poignant reminder to all directors of the risks they face. Shareholders, creditors, competitors, regulators and employees are all potential sources of legal action, and with each new law, the possibility of becoming involved in an official investigation or litigation is heightened.
In the modern business world, the environment in which companies operate is constantly evolving. It is imperative that company directors and officers continuously employ effective methods of risk identification and management. Of course, whilst these may help mitigate the risks associated with corporate stewardship, they will not eliminate risk.
In the current regulatory climate there is an increasing focus on the affairs of companies and their officials. Directors and officers are having to operate in a difficult corporate environment. New challenges and risks are faced in the light of increasing world-wide legislation and high profile media coverage. Mistakes can happen in the course of running the business that adversely affect shareholders, employees, creditors and other interested parties of the company. In these times of high consumer awareness such parties may decide to sue.